Data Bottleneck for Barely Wired Nation

By Matthew C. Klein -
Feb 19, 2014

A specter is haunting the U.S.: No matter where you look, the flow of information -- whether it's downloads of hit films or signal capacity that might make auto travel safer -- seems to be getting choked by a lack of high-speed data connectivity.

That won’t change unless new investment becomes more profitable or the government intervenes by expanding capacity directly.

Consider an article in today’s Wall Street Journal about long download times for Netflix Inc.’s video-streaming service. Netflix, which accounts for about a third of U.S. Internet usage during peak hours, has been developing a network infrastructure called Open Connect that it wants to link to the broadband provided by companies such as Verizon Communications Inc. and Comcast Corp. The goal is to ensure faster download times for Netflix users, especially those who want to watch super high-definition content. Demand for all that HD video programming has slowed Netflix’s average streaming speed on many of the biggest networks over the past few months.

According to the Journal, Verizon has been pushing Netflix to pay fees in exchange for using Open Connect. Other companies, such as Google Inc., Facebook Inc. and Microsoft Corp. already pay to have their networks plugged directly into the pipes that send data across the country at high speeds. Netflix hasn't yet done so. Netflix also could also “route around the jam,” according to the Journal, but so far hasn’t.

The real issue seems to be the unprofitability of investing in additional high-speed Internet capacity. Verizon’s wire-line business is responsible for only about 1 percent of the entire company’s operating income despite bringing in about a third of the total revenue. Meanwhile, the cable companies also face rising costs -- and falling margins -- because the networks continue to raise prices for their programming. These economics make it hard to justify even more investment in broadband capacity unless they can raise prices on the data hogs.

It’s telling that many of the big technology companies now are trying to persuade government regulators to let them use airwaves reserved for automotive safety technologies. Apparently faster Wi-Fi for watching television on mobile devices is more important than developing sensors that could help prevent millions of collisions and save tens of thousands of lives.

The great hope of many consumers is that Google Fiber spreads, although its expansion so far has been slow and measured, in part because it targeted cities that meet very specific criteria. Local governments could also make the investments themselves. That’s what happened in Chattanooga, Tennessee, and a few other small towns, although the evidence suggests that it would be hard to replicate those successes at a large scale without spending a lot of taxpayer money that might be used better elsewhere.

(Matthew C. Klein is a writer for Bloomberg View. Follow him on Twitter at @M_C_Klein.)

To contact the writer of this article: Matthew C. Klein at mklein62@bloomberg.net.

To contact the editor responsible for this article: James Greiff at jgreiff@bloomberg.net.